Just more PCS (Plain Common Sense). What is the next page "come to us" we will take care of your money for you? At a substantial fee, of course. Most on this board have all of this, except the part about using a Financial Manager, memorized by now.

Lots of "do's" and "don't" to identify the problems, but no much offered in the way of solutions.

slepyhed

01-03-2007 08:55 AM

Re: 10 Common Retirement Mistakes

"Although it is nice to have confidence in oneself, you should not take a risk with poor planning... It is worth the money to hire an advisor for assistance. "

Well, I'm no fan of the FP industry, but this might go a little farther than I'd go. Given the state of knowledge/interest of most poeple, solid advice and a little motivational speaking to get them to save is probably needed (even if only a few % actualy do anything, it would be an improvement. The others would at least know what they aren't doing right). The biggest problem is that discerning the true, good planners from the salesmen requires a fairly thorough understanding of the issues. Once you've gone to the trouble to get that understanding, it usually is advantageous to just do the work yourself rather than search for a "good" FP, meet with him/her, explain your situation, and then pay for his/her time.

FinanceDude

01-03-2007 10:02 AM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by slepyhed

Another one:

"If somebody came up to you, placed $1000 on the ground, and told you take it, wouldn’t you pick it up?"

Not really accurate. Should be:

If somebody came up to you, Placed $1000 on the ground, and said, "If you give me $2000 right now, I'll pick up that $1000 for you and you can have it all back in 30 years"....

A bit cynical, aren't we..............or a general mistrust of EVERYONE in society.......... :laugh: :laugh: :laugh:

kcowan

01-04-2007 09:29 AM

Re: 10 Common Retirement Mistakes

Quote:

2. Trying to plan it alone A common mistake that many people face is trying to plan out their retirement without aid from a professional. Although it is nice to have confidence in oneself, you should not take a risk with poor planning. Retirment is 20+ years of your life. It is worth the money to hire an advisor for assistance.

We used professional advice 20 years ago. While there were some good aspects, they fell short on the emphasis on savings and the choices of investments.

Quote:

7. Not planning your retirement lifestyle It is absolutely essential that you try to forecast your expenses during retirement. Blind faith will not keep you from running out of money, even though that would be nice. Retirement takes planning. How can you know how much to save if you do not know how much you will spend?

I think this is very unrealistic. On the one hand, the planning should take place in your 20s before you have established your working lifestyle. Any estimate of retirement lifestyle will be misleading at best,

We have been retired for four years now and we are still planning our lifestyle. OTOH if they present scenarios such as trailer-park living, that might help frame the thinking in terms of options. It might even fall under item 2 if the park is Briny Beach ;D

9. Ignoring inflation Just because you stopped earning money does not mean that inflation stops. You will be horribly surprised when you run out of funds, because you did not calculate for inflation. My dad could buy a hamburger for 10 cents when he was a child. I hope he did not think that was going to last.

This is the most difficult thing to get across to DW. This is a woman with 2 university degrees. She had no trouble grasping the 4% SWR, but the fact that inflation at 3.5% will drive that puppy up each year is an obsticle that she seems unable to get over.

Just last night she says "If we will be making 10% on our investments and only taking out 4% each year, we will be able to leave a ton of money to the kids won't we."

kcowan

01-06-2007 11:30 AM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by mickeyd

Just last night she says "If we will be making 10% on our investments and only taking out 4% each year, we will be able to leave a ton of money to the kids won't we."

I think she is right. It is only if the gap drops that she might be wrong.

The key error here is that an inflation of below 10% will mean you are improving your net worth every year. For every $1 million of starting assets, you will have $8.4 million after 30 years, and $19.7 million after 40 years:http://members.shaw.ca/beachis/SWR-Example.jpg
Such is the power of compounding! Plenty left for the kids...

magellan_nh

01-06-2007 12:31 PM

Re: 10 Common Retirement Mistakes

I think the easiest way to think about portfolio growth is to take the average return (10%) and subtract out inflation (3.5%) and the SWR (4%). That results in 2.5% of "contribution" to real growth of the portfolio.

But wait there's more... You need to pay taxes on the entire 10% return (say 15%), which means you lose 1.5% (of the 2.5% growth). That leaves you with only 1% real growth in the portfolio despite a 10% gross return. (as an aside, you can see why reducing investment expenses by .5-1% makes such a big difference).

This shows the insidious effect of inflation on portfolio growth. You need to pay taxes on the part of the return that's only used to keep the real value of the portfolio steady.

Oh, and one last thing... This all assumes a steady return of 10%. Unfortunately, market returns are volatile and volatility (std deviation) does bad things to ending portfolio values. I'd much rather get a 10% return with 2% standard deviation than a 10% return with 12% standard deviation. if you don't believe me, try out one of the monte carlo retirement calculators and notice the effect on of high volatility on your ending portfolio value.

Jim

OAG

01-06-2007 05:28 PM

Re: 10 Common Retirement Mistakes

Guess this should be in another thread.... Think I will go start it. Something like when does one stop saving -- you ain't going to live forever.

rs0460a

01-07-2007 10:16 AM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by Old Army Guy

Guess this should be in another thread.... Think I will go start it. Something like when does one stop saving -- you ain't going to live forever.

I think it is automatic. The day you die is the day you stop worring about tomorrow - thus the day you stop saving ;) !

- Ron

2B

01-07-2007 02:11 PM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by Old Army Guy

Guess this should be in another thread.... Think I will go start it. Something like when does one stop saving -- you ain't going to live forever.

I'd rephrase the question to cover when do you go for more than a 4% SWR. Many studies show a drop off in spending as we age. Deferring retirement to get enough for the full "desired" retirement lifestyle at a 4% withdrawl rate means you are probably working longer than necessary and/or unnecessarily restricting the early phase of your retirement lifestyle.

audreyh1

01-09-2007 09:00 AM

Re: 10 Common Retirement Mistakes

Expecting an average rate of return of 10% going forward is seriously misguided. If we're lucky, we might see 7 or 8%. Now take SWR, inflation and taxes out of that, and it looks like you are treading water!

Audrey

kcowan

01-09-2007 11:45 AM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by magellan

I think the easiest way to think about portfolio growth is to take the average return (10%) and subtract out inflation (3.5%) and the SWR (4%). That results in 2.5% of "contribution" to real growth of the portfolio.

The reason I did the simple spreadsheet is to avoid the mistake in this thinking. Inflation only applies to your spending. So SWR of 4% will decline as the portfolio returns more than 3.5%. Plus the easiest thing to focus on is spending because investment returns are influenced by many things outside our control.

In our financial plan, I use the average inflation over the last ten years. I also use an investment return of 7%. And I plan for capital adjustments such as new cars in the year I expect to buy them.

And taxes only apply to the taxable returns you achieve so you can delay taxes on capital gains until you actually have to crystallize them. If you assume all your portfolio returns are taxable, then you need to reassess you investment strategy. Tax deferral can make a major difference in overall returns.

slepyhed

01-10-2007 09:44 AM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by magellan

...
Oh, and one last thing... This all assumes a steady return of 10%. Unfortunately, market returns are volatile and volatility (std deviation) does bad things to ending portfolio values. I'd much rather get a 10% return with 2% standard deviation than a 10% return with 12% standard deviation. if you don't believe me, try out one of the monte carlo retirement calculators and notice the effect on of high volatility on your ending portfolio value.

Jim

Volatility doesn't *always* do bad things to your portfolio. It adds uncertainty! I think those ending portfolio values you are seeing from the mote-carlo calculators are potential worst-case ending values. Best case ending values would be stratospheric! Hopefully your experience will fall somewhere between those two extremes.

magellan_nh

01-10-2007 01:52 PM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by kcowan

The reason I did the simple spreadsheet is to avoid the mistake in this thinking. Inflation only applies to your spending. So SWR of 4% will decline as the portfolio returns more than 3.5%. Plus the easiest thing to focus on is spending because investment returns are influenced by many things outside our control.

kcowan,

I still stand by my logic, although reasonable people can differ as to how to best visualize this problem.

My point was that you can remove the inflation variable from the equation by subtracting it out of the portfolio growth rate up front. Maybe you don't find this intuitive and would rather focus on the spending side, but calculation wise, it's six for one and half-a-dozen for the other (except for taxation differences).

The engine that powers spending in retirement is the portfolio balance. The horsepower of that engine is affected by the portfolio's real rate of growth. As a portfolio's real rate of growth diminishes (especially below zero), the likelihood of retirement ruin increases, especially for longer retirements.

One reason we might see this problem differently is that I retired in my early 40s, so my time horizon is very long. I need to stay focused on keeping our portfolio's real value from declining or else my odds for success aren't good.

Jim

magellan_nh

01-10-2007 02:05 PM

Re: 10 Common Retirement Mistakes

Quote:

Originally Posted by slepyhed

Volatility doesn't *always* do bad things to your portfolio. It adds uncertainty! I think those ending portfolio values you are seeing from the mote-carlo calculators are potential worst-case ending values. Best case ending values would be stratospheric! Hopefully your experience will fall somewhere between those two extremes.

slepyhed,

The ending portfolio values output from monte carlo calculators are usually median portfolio values (half of trials are higher and half are lower). But ending portfolio value isn't really the issue. The real issue is that most people want to make a retirement plan that has a high likelihood of success, like 85% or higher, instead of just a 50/50 chance of success. I didn't do a good job of emphasizing that in my original post.

If you want your retirement plan to have a high probability of success, increasing volatility is going to reduce your SWR. In addition, portfolio returns usually suffer from kurtosis or negative skew, so the effects of volatility would likely be even worse than a simulator shows.